Re: How much of our "wealth" is real?? Today's bankruptcy rate is TEN TIMES that of Great Depression
- From: Scotius <wolvzbro@xxxxxxxx>
- Date: Mon, 26 Mar 2007 00:50:20 -0500
On Sun, 25 Mar 2007 14:57:21 -0400, "Joe S." <none@xxxxxxxx> wrote:
America is very wealthy country, but one has to wonder how much of our
wealth is in fact a chimera, spun of a consumerist ideal and given the
appearance of solidity by a flood of easy credit? How much poverty and real
economic pain is covered up by an endless succession of pay-day loans and
EZ-finance rip-offs that eventually just bury people under mountains of debt
from which they have little chance of digging themselves out.
Today's bankruptcy rate is ten times what it was during the Great
Depression, foreclosures are at a 37-year high and the United States has a
negative savings rate, yet we're told every day that the economy is going
George W. Bush often points out that more Americans own their own homes
today than ever before. He doesn't mention that they also have less equity
in those homes than ever before. Every day brings news of the potential
scope of the emerging "sub-prime" loan scandal -- what Robert Kuttner called
"deregulation's latest gift" -- and new indicators that the housing market
that's driven so much of the economy for the past five years is a bubble
that's begun to burst right before our eyes.
Compounding our personal debt problems are our representatives, equally
profligate spenders who are just as happy to run up enormous budget deficits
and who reflexively guarantee and subsidize trillions of dollars of new
loans to already strapped American businesses and consumers.
It's a pretty good time to ask ourselves just how we got here.
Writer and film director James Scurlock does just that in the documentary,
and now book, Maxed Out: Hard Times, Easy Credit and the Era of Predatory
Lenders. The film is a sprawling look at the seamy underside of the American
credit industry -- an industry whose practices have changed dramatically
since deregulation, and not for the better -- and at those who end up caught
in a trap of their own creation.
The film is not perfect. Its view is broad but lacks depth; while it makes
its point with some really effective storytelling, the documentary acts on
an emotional level but lacks the kind of narrative power that makes Michael
Moore's films, for example, such controversial cultural touchstones.
What Scurlock's camera does brilliantly is lay bare an issue that affects
millions of working Americans but is usually buried under layers of shame
and taboo. The film tells the individual human stories that lie behind the
bankruptcy statistics, behind the foreclosure numbers. The book, released
this week, follows up with much of the narrative power and depth that the
AlterNet caught up with Scurlock by phone this week to talk about his
project and the country's emerging debt crisis more generally.
Joshua Holland: You really tapped into something at the right moment --
people have become aware of the issue of debt, and we're now hearing about
it described as an emerging crisis.
James Scurlock : When I started the project a lot of people didn't even know
what bankruptcy reform was, but most do now. A few weeks ago, nobody knew
what "subprime" meant and now because of this whole mortgage fiasco I think
everyone knows what that means. So here we are, two years after the start of
the project and everything discussed in the film and the book has gotten
worse. As we talked to people for the film, it became pretty obvious that
things were just totally out of control and there was this sense that at
some point the chickens are coming home to roost and that's largely what's
been happening. I'm not gloating about that -- it's really tragic.
But my sense -- and I've talked to a lot of people since the project's been
done -- is that the really big system hits are yet to come. There are a lot
of bad mortgages out there; there are a lot of these "liar loan" mortgages
out there; there are a lot of credit cards and people used to paying off
their bills by refinancing their houses every year.
Holland: Debt -- or credit -- has always been an important part of the
economy; it allows people to invest and it encourages entrepreneurship --
all the standard things we learn about in Econ 101. But one thing I came
away with is that we're looking at a very different credit industry in the
last couple of decades than what we experienced earlier. What's different
between the credit industry today compared to, for example, the industry
during my parents' generation?
Scurlock: The biggest change, by far, is how the financial industry sells
debt -- how it sells credit cards and mortgages and all these different
products. A generation ago, you'd go to the bank for a personal loan and
that was a very rigorous process. You had to provide them with proof of
earnings -- your tax returns -- and you gave them references and really had
to work for it. The flip side of that was that if they gave you a loan, you
got it at a reasonable interest rate. Now we're in a situation where we're
getting 17 billion hits of direct mail encouraging us to borrow at often
very high interest rates; we're getting e-mails every day encouraging us to
refinance our homes; we get offers of credit for every conceivable thing
from plastic surgery to automobiles -- there's a credit card now for
gambling and one to pay off your taxes. Everything. Small businesses never
used to use credit cards at all. They'd go to the bank and get a small
business loan with a fixed payment. Now they're primarily using credit
At the same time, the way the credit industry behaves has just completely
transformed itself. Its underwriting standards have gone way down and that's
a big part of the reason we're seeing so many problems now.
Holland: That's a good transition point. I read somewhere that you were
voted the most conservative person in your class at Wharton Business
Scurlock: Actually, in my high school .
Holland: OK, in high school. The reason I found that interesting is that you
give very short shrift to the traditional conservative narrative around
these issues. You don't focus a lot on "personal responsibility" -- on the
often really bad choices people make on the way to getting into problems
with debt. You focus on these unbelievably predatory situations -- scenes
like the mentally handicapped guy with the low-interest government loan who
you show getting hoodwinked into this high-interest loan. Respond to that.
Scurlock: You know, everybody in the film and everyone in the book will
readily admit that they screwed up. They made a mistake: they bought to many
commemorative plates from Franklin Mint or they took out cash advances to
pay their mortgage or they bought one of those Ab-tronic belts that are
supposed to give you perfect abs in five minutes or they built a 10,000
square-foot McMansion which they knew they wouldn't be able to afford if
interest rates were to go up -- which they did -- and on and on.
So that's all there, but what surprised me -- and what got a lot of these
people into such deep trouble -- is that lenders weren't asking for their
money back along with a reasonable return and maybe a fee or two. They were
asking for multiples of what these people had originally borrowed. The line
between a loan-shark and a reputable bank has now become so blurred with
these banks all writing high-risk, high-interest loans and slapping on all
these fees and coming up with all these schemes like double-cycle billing
and universal default and on and on.
It's getting to the point now where people actually have a hard time
figuring out just exactly what they owe. There was one woman in the film who
had a gambling problem -- someone who was very irresponsible, and no one
would argue otherwise. But in one year her $12,000 debt went to $50,000 and
she didn't make any new charges. There was a guy who testified before
Congress recently and he had borrowed $3,200 and had paid Chase back $5,000
or $6,000 and they were still demanding another $5,000 from him.
And if you look at every study done or if you look at what New Year's
resolutions people make it becomes clear: people want to pay their debts
off. But they're increasingly getting into situations where their $1,000
debts are becoming $4,000, or their mortgage payments are doubling and they
don't understand how that happened and in many cases it's just devastating.
Now, there are two parties to these contracts -- that's absolutely true. But
the banks have the ability to change the terms and conditions, at will, and
these contracts have become so complex that even the Harvard Law professor
in the film has a hard time making sense of them. Sometimes bankers can't
make sense of the mortgages they're selling. So, caveat emptor, yes, but you
should be able to walk into a major banking institution without worrying
that you're going to get loan-sharked.
Holland: Maybe you can explain something that I think would be fairly
counterintuitive for most people. You say in the book that the common view
many people have about bankers is that they're this conservative breed who
make their money by being cautious, by writing smart loans, but in fact the
real money is made by lending on the margins -- by giving loans to people
who are most likely to have problems paying them back.
Scurlock: That's right, it is counter-intuitive. It's because it's gone from
a business based on a conservative business model where you were loaning to
people who could safely pay you back and you weren't making a ton of
money -- just a bit on the spread -- so you had to look at all your risks
very, very carefully in order to make money. That model is now history, and
the new one is that you charge a huge amount of fees, and a very high rate
of interest. So the trick is actually getting people who will pay the most
interest and the highest fees.
Credit card fees went from $1.7 billion dollars per year in 1996 to almost
$18 billion last year -- an increase of more than a 1000%, and that's where
the money is. Now you take someone who pays their bills on time, who has
savings and pays their credit cards down each month, well they're not going
to pay those fees. They don't have to. And you want someone who really needs
the credit, who will be willing to pay a very high price for it.
One thing you've got to understand is that we have a negative savings rate
in this country. Two out of three people can't pay their credit cards off
each month. At the same time, last year we cashed $800 billion dollars out
of home equity. Trillions of dollars in the last few years have been cashed
out of people's homes and much of that went to paying off credit card bills.
And the cycle continues. So it's a bit like Enron -- you've got some wishful
thinkers, and then there are these bankers making enormous fees and at the
end nobody's stepping in to stop the party.
Holland: To what degree do you see this as a kind of cultural
manifestation -- a reflection of how much value we as Americans tend to put
on material wealth, or how much we see material wealth as a proxy for
Scurlock: I think that has a lot to do with the taboo nature of the
problem -- a lot of people just don't want to about it. Until Katrina, I
don't think many people had really seen images of poor Americans. There's
this scene in the film where Robin leach of Lifestyles of the Rich and
Famous says nobody would watch a show called "lifestyles of the poor and
unknown." We just make poor people invisible in this country and there's a
sense that if you can't afford something, you've failed.
And the truth is, there are a lot of people in this country who look like
they're middle class but in fact if you took away their credit cards you'd
see that they're actually quite poor.
Bonus points if you can tell how this relates to Bush saying
"The right hand knows what the left hand's doing now...". Get it? In
intel parlance, that would mean that the people who used to operate
above board are working with the scum of the Earth. In banking, it
would mean that the lines between a bank and a gang of loan sharks are
now "blurred". Yeah, they're blurred alright, and the bankers have a
great enabler in the White House. Guess what; no Dem except for the
FEW honest ones there are would do anything differently, or even
suggest re-regulating the credit industry, and so would very few
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